Why the Best Product Doesn’t Always Win

March 28, 2012

Entrepreneurs often think only the best product will let them succeed. But sometimes ‘best’ isn’t what your customers really want.

Ever buy and eat a meal from a lunch wagon? You know, those metal trucks that travel to construction sites, small factories, office parks, and other places that don’t have their own cafeteria services? They have a lot in common with Amazon.com.

Don’t believe it? Ask Dartmouth professor of strategy Ron Adner, who wrote in the Harvard Business Review about Amazon competing with Apple. No direct mention of lunch wagons, but hang tight for a moment.

Noting that Amazon had the closest thing in the Kindle Fire to Apple’s iPad, Adner wrote the following:

With the Kindle Fire, which was introduced last year, it is pressing forward with a full-fledged ecosystem strategy. It is pairing substantial carryover (the entire range of its e-book activities coupled with current users’ e-book libraries) with substantial investment. Amazon is sacrificing hardware margins to position the Fire as a low-priced tablet and is subsidizing the participation of book publishers and movie studios in order to allow its core Amazon Prime customers to access books and videos with the device.

Instead of trying to match Apple in product features and quality, Amazon has specifically leveraged a different business model. The company counted on its ability to make money over the lifetime of a client and uses low cost to address a potentially sizable tablet market that is either unwilling or unable to meet Apple’s $500 entry point pricing and will settle for a less robust product.

Now back to the lunch wagon. The point is not an ecosystem to sustain pricing under cost, but that commerce depends on multiple factors, any of which might be more important than others to a given set of customers. Product quality? Certainly important, but often only as a barrier of entry. For example, the Kindle Fire needed a color screen, but one smaller than the iPad’s, and without Apple’s Retina display, would suffice.

The lunch wagon sandwich is unlikely something you go out of your way to find. But when time is limited, having someone come to your door can trump a better product because what is most important to you then is availability. Or price might be a deciding factor, when you have enough cash on you for a muffin and cup of coffee rather than a full entrée at a nearby restaurant. The lunch wagon may offer convenience, allowing customers to run tabs.

Such principles are true for any business. To understand what will work, you need to understand explicitly what motivates your customers, not someone else’s. The motivations of various market segments may mean that you don’t have to pour money into topping every competitor. You just have to provide people what is actually most important to them in such a way that you can sustain a business.

Erik Sherman‘s work has appeared in such publications as the Wall Street Journal, New York Times Magazine, and Fortune. He is a blogger for CBS MoneyWatch and InsideInvestorRelations.com. @ErikSherman